Thinking like an Economist

• What are the two roles economists play?


  Scientists and policy advisors
• What is the purpose of the scientific method in economics?


  To develop and test theories about how the world works
• How do economists use models in their studies?


  To create simplified representations of complex realities
• What does the circular-flow diagram represent?


  • Visual model of the economy
  • Shows how dollars flow through markets
  • Involves two decision makers: firms and households
  • Interacts in two markets: goods and services, factors of production
• What does the production possibilities frontier (PPF) graph represent?


  Combinations of output that the economy can possibly produce
• What do points on the PPF indicate?


  Efficient use of all resources
• What do points under the PPF represent?


  Possible but not efficient production
• What do points above the PPF indicate?


  Not possible production levels
• What does moving along the PPF involve?


  Shifting resources from the production of one good to another
• What does the slope of the PPF represent?


  The opportunity cost of one good in terms of the other
• What does a straight line PPF indicate?


  Constant opportunity cost
• What does a bowed outward PPF indicate?


  Increasing opportunity cost
• Why does the PPF become steeper when shifting resources?


  Because the opportunity cost of producing one good increases
• When is the PPF bowed outward?


  When different workers have different skills and opportunity costs
• What is microeconomics?


  The study of how households and firms make decisions
• What is macroeconomics?


  The study of economy-wide phenomena
• What are positive statements in economics?


  Descriptive statements that can be confirmed or refuted by evidence
• What are normative statements in economics?


  Prescriptive statements about how the world should be
• Why might economists give conflicting policy advice?


  • Disagreement about the validity of positive theories
  • Different values leading to varying normative views
  • Yet, many propositions have broad agreement among economists